A woman pulls water from a borehole in an impoverished settlement in Hopley, Harare, Zimbabwe, in a June 23 photo. Many Zimbabweans are struggling to make ends meet amid the coronavirus lockdown in a country where nearly half the population makes a living in the informal sector. According to the World Bank, children are most affected. [Aaron Ufumeli/EPA]
As the global economy gradually recovers from the pandemic, the fortunes of the rich world and the developing world are diverging. The World Bank predicts that emerging economies (excluding China) will grow 0.8% less annually than advanced economies in 2021-23, while growing 0.7% faster than advanced economies on average in 2010-19. The poor countries will grow 1.9% less than the rich countries. The pre-pandemic convergence trend between developing and developed countries is about to reverse.
The Great Divergence, as the two-speed recovery from the pandemic is called, reflects the vulnerability of many developing countries that lack the fiscal space to effectively support their economies. They also struggle with a shortage of vaccines, which exacerbates the growth deficit. It is estimated that 85% of vaccines went to high- and middle-income countries, while only 0.3% went to poor countries. The number of people in deep poverty (living on less than $ 1.90 a day) rose 124 million in 2020 from a non-pandemic baseline, while an additional 39 million due to two-speed recovery.
So far the rich countries have not done much for the poorest countries. Most notably, the G20’s suspension of debt payments to official creditors of 73 vulnerable economies, which was extended through the end of 2021. The relief is temporary, however, as these countries will have to repay roughly $ 600 billion worth of debt by 2025.
Last month’s G7 summit launched a massive infrastructure investment plan in middle- and low-income developing countries (Build Back Better World – B3W) at the initiative of the US. The central goals are to contain climate change, promote health, promote the digital economy and improve gender equality. However, the plan is vague about the funding to be mobilized and whether to add it to ODA. It seems to rely more on the private sector as a catalyst for development finance. It looks more like a step with multilateral support in the US geopolitical confrontation with China.
China’s geopolitical influence in developing countries has grown since the Belt and Road Initiative (BRI) was launched in 2013. The program aims to map the economic geography of the world’s largest land mass, from Southeast Asia to the outskirts of Europe, through a modern “silk road” with integrated land and sea connections. The cost of the program could reach $ 1.3 trillion by 2027, though estimates remain unclear. Investments are made by Chinese state-owned companies or, mostly on commercial terms, financed by state-owned Chinese banks.
The 70 countries participating in BRI will benefit from an estimated 10% increase in trade and a 3.4% increase in GDP. However, there are also risks related to the debt sustainability of fragile economies in the region, the environment and a lack of investment transparency. The advantages for China are also substantial: State-owned companies channel excess production capacities abroad, new export markets are created, the international role of the renminbi is strengthened and, at the same time, China is gaining geopolitical influence.
The geopolitical rivalry between the G7 and China is unlikely to help the poorest developing countries. Poor countries need a steady flow of cheap finance, but also debt relief. Instead of fighting for geopolitical influence in developing countries, the G7 and China should focus on innovative and generous solutions. The US proposal, approved by the G7, to introduce a minimum global tax of 15% on multinational corporations to curb tax competition could offer such a solution. The advanced economies, where most of the multinationals are located, will receive the lion’s share of the additional revenue from the tax. Instead of using these revenues domestically, an alternative would be to use them as a means of improving financial support to poor countries.
The Organization for Economic Co-operation and Development estimates the additional global minimum tax revenue for multinational corporations at $ 60-100 billion annually. On the other hand, development aid from OECD countries amounted to $ 161 billion in 2020. It was equivalent to just 1% of the various domestic stimulus packages and support measures taken by developed countries to cushion the pandemic crisis. Adding the additional global corporate tax revenue would increase development aid by about 50%. More generous financial support could fund much-needed infrastructure, but also reforms to restore growth and improve resilience in the poorest countries. It could reduce the risk of a growing gap between rich countries and developing countries in the wake of the pandemic.
Aristomene Varoudakis is a former professor of economics at the University of Strasbourg and a former official at the World Bank and the OECD. This article was first published on Kathimerini’s Money Review: https://www.moneyreview.gr/opinion/37313/i-megali-apoklisi-kai-i-geopolitiki/